It is on the rare occasion that I end up only briefly touching on the pricing question when working with clients. This is not to say that pricing is always a topic of heated contention, but I would argue that most, if not all businesses, are constantly reviewing their respective pricing strategy to remain both profitable and competitive. It is also worth pointing out that in many cases, broaching the subject of pricing requires a more delicate disposition on the part of advisor or coach and is usually something that only takes place when a significant amount of trust has already been established.
This is no different in my case and is why pricing strategy is not something I typically work on with clients right at the outset. The reason for this, is that there is often a psychological process that is connected to how businesses price their products or services, be it at a conscious or sub-conscious level. Further to this, there is no hiding from the fact that it is by far one of the most important aspects to consider for any business and certainly goes right to the heart of how an organisation positions itself in its relevant market.
I think we can all agree how important it is to get your pricing strategy right. The good news is that there are some simple steps you can take to break things down to provide the direction and clarity you need, which will then allow you to move forward and focus on the other key metrics that ultimately drive performance. With that in mind, I think it is important to realise that the pricing conversation must go beyond what is readily available out there in terms of labelling different pricing options you can choose to pursue, such as cost-plus, competitive, penetration, values-based, skimming or dynamic. The list goes on, but the point I am trying to make is that determining which so-called pricing strategy to implement should not be the starting point of the process but rather the end result.
Let me explain……the reality is any pricing decision involves almost every part of the business, however at its core, the answer usually lies where finance and marketing are both able to adequately inform and are strongly aligned to meeting organisational objectives. I also deliberately place finance before marketing as this is how I approach the subject with clients.
When leading the pricing discussion, the first question I ask is: “what are your profit goals?” This bottom-up approach I believe is where things need to begin. From there, building out your profit and loss forecast based on a realistic pricing model, complete with a thorough analysis of what your gross and net margins need to be (that match your initial profit goals), is a task that is worth the time investment. It will help you get even more familiar with your numbers and get clarity around what your break-even looks like as well.
Once clients have done all the hard work on the financial side of things, it can be tempting to reach your pricing conclusion right there and then. Assuming your initial pricing model does end up showing some healthy profit margins, do not be complacent, but be sure to follow through with the next step in the process by putting on your marketing hat. By this, I mean re-evaluate your market positioning, secure enough intelligence to conduct a thorough competitor analysis and be ready to articulate your customer value proposition. Working through this strategic marketing process will likely shift the dial more towards value rather than price and will undoubtably give you a more holistic view and balance out the limitations that comes with an approach that focuses solely on economic rationality.
Once you have clarity on both the financial and marketing perspectives, I would argue that it is no longer an educated guess when you determine your final pricing strategy. It is true that most larger organisations have the benefit of drawing on internal capabilities from finance and marketing departments amongst others, but I see no reason why small businesses cannot be more strategic about their pricing. Having an accountability partner that is knowledgeable in this area may be all that you need to finally move away from the “thumb suck” approach and help break down any unhelpful belief systems that may cause you to under-value your services in any shape or form.